2.4 Penalties Flashcards
(31 cards)
who are subject to penalties?
- tax return preparers
- individuals with supervisory responsibility for advice given by a firm
how much is the penalty
a penalty of up to $31,500 per year may be imposed on a tax return preparer at $60 for each failure with each procedural requirement
what are applicable procedural requirements with respect to returns, claims and employees…
- signing a return or claim
- affixing an identifying number
- furnishing a copy to the taxpayer
- filing a correct information return
- retaining records by copies or a lost
misconduct
a court may issue an injunction upon finding that a tax return preparer has engaged in one of the following:
1. misrepresenting eligibility to practice before the IRS
2. guaranteeing a tax refund or allowance of a credit
3. substantially interferring with internal revenue laws through deceptive fraudulent conduct
4. understating tax liability
in the case of an injunction , the court might enjoin the person from…
- engaging in such conduct or
- acting as a tax return preparer if the court finds a pattern of continual or repeating conduct
accuracy related penalty
generally the accuracy related penalty is 20% of any portion of a tax underpayment attributable to:
1. negligence or disregard of ruled or regularities
2. any substantial understatement of income tax
3. any substantial valuation misstatement under chapter 1 of the IRC
4. any substantial overstatement of pension liabilities
5. any claim of tax benefits from a transaction lacking economic substance or failing to meet the requirements of any similar rule of law
when can this 20% accuracy related penalty double up to 40%?
the penalty is 40% of any portion of a tax underpayment attributable to one or more gross valuation misstatements
also for failing to adequately disclose a transaction that lacks economic substance
or for any undisclosed foreign financial asset understatement
what is substantial understatement
if the income tax of the amount of understatement for any year exceeds the greater of 10% of the tax required to be shown on the return of $5000. essentially there is a substantial understatement if the tax required is 10% greater than what should be reported or $5000, whichever is greater. for a corporation it is also the LESSER of 10% of the tax required and $10,000,000
what is substantial valuation misstatement
a taxpayer is liable to a 20% penalty for a substantial valuation misstatement if all the following a true
1. the value of adjusted basis of any property claimed on the return is 150% or more of the correct amount
2. the taxpayer underpaid the tax by more than $5,000 because of the misstatement
3. the taxpayer cannot establish reasonable cause for the underpayment and that he acted in good fiath
ALL 3 CRITERIA MUST BE MET
is there also a 40% penalty for this?
yes - the taxpayer may be assessed a penalty of 40% for a gross valuation misstatement
- if the value misstated or the adjusted basis of property is 200% or more of the amount determined to be correct, the taxpayer will be assessed a penalty of 40% of the amount the taxpayer underpaid because of the gross valuation misstatement
- penalty is also 40% if the property’s correct value or adjusted basis is zero
Transaction lacking economic substance
economic substance is highly dependent on the facts of the situation. Notice 2014-58 underscores two important concepts for determining whether or not a transaction has economic substance. 1. the transaction changes in a meaningful way, apart from federal income tax affects, the taxpayers economic position 2. the taxpayer has a substantial purpose, apart from federal income tax effects, for entering into such transactions
accuracy related penalty avoidance
they can avoid these penalties if the position is adequately disclosed and has at least a reasonable basis
Cannot blame tax software to avoid penalties
negotiating refunds
CANNOT DO THIS
a penalty of $635 is imposed on a tax return preparer for each taxpayer refund check he negotiates
due diligence requirements
section 6695 imposes a $635 penalty with respect to any return or claim for refund for each for each failure to comply with the four dur diligence requirements of the earned income credit, American opportunity credit, child tax credit and head of household filing status. these credits and filing status cane be abused - the credits are refundable and the head of household filing status has a lower rate structure than that of single.
what are the 4 steps required to avoid the $635 due diligence penalty
- Complete Form 8867
- Submit form 8867 in the manner required
- Knowledge
- interview the taxpayer, ask questions and document the taxpayer’s responses and review the information to determine that the taxpayer is eligible to claim the credits or file as HOH - record retention
- document any additional inquiries and the clients responses
the due diligence checklist requires the retention of the following 5 records
- form 8867
- the applicable worksheet or the preparers own worksheet for any credits claimed
- copies of any taxpayer documents’ relied on to determine eligibility for any credits or HOH filing status
- a record of how, when and from whom the information used to prepare the form and worksheet was obtained and
- a record of any additional questions the preparer asked and the clients answers
how long should the records be kept for?
3 years from the latest of the following due dates:
1. the due date of the tax return
2. the date the return was filed
3. the date the return was presented to the taxpayer for signature
4. the date a preparer submitted the part of the return for which they are responsible to the signing tax return preparer
underpayment penalty
penalty of the greater of $1000 or 50% of income derived by preparer as to the return
what 4 criteria must be met in order for the penalty to apply?
- understatement of a tax liability
- a position with no reasonable belief of sucess
- knowledge, or frivolous position
- non-disclosure or a frivolous position
when can you get a penalty exclusion
- shows there was a reasonable cause for the understatement and
- acted in good faith
criteria 1 - understatement of tax liability
- understating net tax payable
- overstating the net amount creditable or refundable
criteria 2 - reasonable belief
penalty is imposed for taking a position with no reasonable belief that the tax treatment of the position would more likely than not be sustained on its merits. more likely than not means more than 50%. therefore the possibility of underpayment must have at least the possibility of more likely than not per wreck. Also. assuming a position is not frivolous, meaning flagrantly incorrect, if the possibility of being sustained does not meet the more likely than not standard, but is disclosed on the return, an underpayment penalty may be avoided.
criteria 3 - knowledge of unreasonable basis
for a penalty to apply, the tax return preparer must know that the position has no reasonable belief of a more likely than not chance of success, or the position must be frivolous
criteria 4 - non disclosure of relevant facts
the understatement penalty is not imposed if the relevant facts affecting the items tax treatment are adequately disclosed in the return or in a statement attached to the return. this does not apply if the position if frivolous
